Draft Legislation Released for Anti-Google Tax

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1 Australia Michael Butler and Marianna Danby* Draft Legislation Released for Anti-Google Tax The Australian government has released draft legislation that would prevent international corporations from avoiding Australian tax liability by artificially limiting their taxable presence in Australia. 1. Introduction On 12 May 2015, the Australian government released for comment an Exposure Draft of the Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015 (the Draft bill), together with Exposure Draft Explanatory Material (the Draft Explanatory Material). The Multinational Anti-avoidance Law is designed to prevent foreign corporations from using complex, contrived and artificial schemes that enable them to have substantial sales activities in Australia, but to book revenue offshore and pay little or no tax worldwide. 1 The new legislation is expressly intended to ensure that multinational corporations pay tax where they have earned their profits. 2 The Multinational Anti-avoidance Law is targeted at 30 identified (but unnamed) multinational corporations (principally IT companies) that sell goods and services to Australian customers, with the assistance of related parties in Australia, but which do not have permanent establishments in Australia and therefore are not subject to Australian tax. By paying licence fees to related parties located in tax havens (for example using the so-called Double Irish with a Dutch Sandwich arrangement), those corporations ensure that very little if any tax is paid, either in Australia or offshore. 3 This article: summarizes the Multinational Anti-avoidance Law proposal; examines the suggestion that the proposal would seek to overrule 90 years of international tax principles tracing back to the efforts of the League of Nations in the 1920s; and * Michael Butler, Tax & Revenue Partner, Finlaysons and Marianna Danby, Law Clerk, Finlaysons. The authors can be reached at michael. butler@finlaysons.com.au and anni.danby@finlaysons.com.au, respectively. The authors thank Jessica Pengelly for her useful editing comments and Cristy Fopp for catching a late train to Gawler to enable the authors to complete this article. 1. AU: Exposure Draft Explanatory Material, para Draft EM, supra n. 1, para AU: The Hon Joe Hockey, Treasurer of the Commonwealth of Australia, Strengthening Our Taxation System, (11 May 2015), available at ministers.treasury.gov.au/media-release/ considers a number of issues arising in connection with the new rules, and respectfully suggests that Australia should hasten slowly before enacting those measures. 2. Background The Australian government has been a strong supporter of the OECD s base erosion and profit shifting (BEPS) project. 4 The government has, on a number of occasions, stated the importance of multinational corporations paying their fair share of tax. 5 As part of the BEPS project, the OECD has stressed the importance of a multilateral implementation of changes to the international tax system. However, Australia has decided to take unilateral action and amend its domestic tax rules to deal with foreign corporations that sell goods or services to Australian residents, without setting up a permanent establishment or other taxable presence in Australia. The new measures are targeted at 30 multinational corporations that have been identified, through recent Australian Taxation Office (ATO) audit activity, as having substantial sales in Australia but paying little, if any, Australian tax. 6 The concern that multinational groups are avoiding Australian tax by shifting profits offshore has been highlighted, in particular, by the recent ongoing enquiry by the Senate Economics References Committee into corporate tax avoidance, chaired by Senator Sam Dastyari. That Committee has publicly grilled executives from a large number of multinationals including Apple, Microsoft, Google, News Corporation, BHP Billiton, Rio Tinto, Chevron, ExxonMobil, Shell Pfizer, Johnson & Johnson, Roche and GlaxoSmithKline on tax minimization using profit shifting. 3. Proposed Changes to Part IVA of the Income Tax Assessment Act 1936 Unlike the diverted profits tax announced earlier this year by the UK government, the Australian proposal does not introduce a new tax, but rather amends the existing general anti-avoidance provisions in part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). 4. See e.g. M. Butler, L. White & M. Prpich, Australian Taxation Office s Transfer Pricing Risk-Rating System, 22 Intl. Transfer Pricing J. 2, at 71 (2015), Journals IBFD. 5. See e.g. A. Heber, Joe Hockey Targets 30 Companies for Tax Avoidance, Business Insider: Australia (17 Aug. 2015), available at 6. Hockey, supra n. 3. IBFD INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER

2 Michael Butler and Marianna Danby 3.1. Section 177DA New section 177DA ( Schemes to limit a taxable presence in Australia ) would apply to a scheme if: a non-resident of Australia makes a supply to an Australian resident that is not an associate of the non-resident (i.e. makes a supply to an unrelated third party); income derived from the supply is not attributable to an Australian permanent establishment of the nonresident; activities are undertaken in Australia in connection with the supply; some (or all) of those activities are undertaken by an Australian resident that is an associate of or is commercially dependent on the non-resident; the non-resident s annual global revenue exceeds AUD 1 billion; the non-resident is connected with a no or low corporate tax jurisdiction. A non-resident will be deemed to be so connected if any of the activities of the nonresident, or any other member of the global group, give rise to income that (i) is subject to no corporate income tax or to a low rate of tax or (ii) is not subject to income tax under any Australian law or foreign law ( stateless income ); 7 it would be reasonable to conclude by reference to certain specific matters that the scheme is designed to avoid the non-resident s deriving income that would be attributable to an Australian permanent establishment of the non-resident; and it would be concluded by reference to those specific matters that the scheme was entered into for a principal purpose of enabling a taxpayer to obtain a tax benefit. base penalty amounts, and additional amounts of 20% and 10% if aggravating factors apply). A profit shifting scheme will also be regarded as a tax avoidance scheme if the taxpayer has a sole or principal purpose of obtaining a transfer pricing benefit from the scheme. The new penalties will not apply if the taxpayer adopts a position that is reasonably arguable, although the penalty could still be as high as 30% if the taxpayer is treated as entering into, or carrying out, a tax avoidance scheme Example of operation of section 177DA The following example, which is illustrated in Figure 1, is adapted from the Draft Explanatory Material. 10 Assume that B Co, a business based in Country B, sells enterprise software to Australian business customers. An Australian subsidiary of B Co (Sub Co) employs highly skilled staff, who provide significant levels of support to Figure 1 Actual structure Double Irish with a Dutch Sandwich C Co (No-tax jurisdiction) 3.2. Consequences if section 177DA applies If section 177DA applies, the scheme will be subject to the application of part IVA, allowing the Commissioner to cancel tax benefits obtained in connection with the scheme and reconstruct an Australian tax liability. The Draft Explanatory Material indicates part IVA would be applied by attributing the income from the supplies to Australian residents, to an Australian permanent establishment Penalties In addition, amendments in the Exposure Draft of the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015 which apply to entities with annual global revenues of AUD 1 billion or more would double the maximum penalties that may be imposed where an entity enters into a tax avoidance or profit shifting scheme. 9 The maximum penalty payable for a tax avoidance scheme would thus be 120% of the tax shortfall, or 60% in the case of a profit shifting scheme (100% and 50% Licence Fee (substantial) B Co (Country B) Sells to Australian customers (No PE in Australia) Sales assistance Customers Australian Sub Co 7. Draft EM, supra n. 1, para Draft EM, supra n. 1, para AU: Taxation Administration Act, 1953, proposed sec (3) of Sch.1, National Legislation IBFD. 10. Draft EM, supra n. 1, Examples 1.14 & INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER 2015 IBFD

3 Draft Legislation Released for Anti-Google Tax Australian customers. Sub Co uses sophisticated analytics to establish a business case for B Co s products and provides customers with advice on product optimization, pricing and terms. Australian customers who buy the product almost exclusively deal with the Australian employees. However, the sales contracts which are agreed between the Australian customer and Sub Co, are actually legally binding on B Co and the revenue is recorded in B Co s accounts. Australia has an income tax treaty with Country B. The Draft Explanatory Material suggests it would be reasonable to conclude that this scheme has been designed to avoid the attribution of income, from the supply of software to Australian customers, to a permanent establishment in Australia. Sub Co is providing, through its employees in Australia, significant levels of support to the customer, and commercial discussions are almost exclusively conducted with the subsidiary, even though it is not legally allowed to do so under its service agreement with B Co. B Co uses an identical structure throughout the region. All sales revenue from the region is recorded in B Co s accounts. However, B Co has only a small number of employees, and they undertake mostly clerical work. B Co pays a large licence fee to a related entity (C Co) in Country C, a no-tax jurisdiction, for the use of the intellectual property associated with the software sold by B Co. Under the tax treaty between Country B and Country C, no royalty withholding tax is payable. The structure described in the Draft Explanatory Material has a number of similarities with the arrangement that has become known as the Double Irish with a Dutch Sandwich. However, withholding tax would have been payable in Australia if the royalty paid by B Co to C Co was an expense incurred by B Co in carrying on business in Australia at or through a permanent establishment in Australia. This would be the case for most other market countries in the region. The Draft Explanatory Material suggests that the conclusion in this case would be that B Co carried out the scheme for a principal purpose of enabling both B Co and C Co to obtain a tax benefit and to reduce C Co s withholding tax liability under a foreign law. However, no reasoning is provided in support of this conclusion. B Co obtains a tax benefit in not including an amount in its assessable income from the income attributable to a permanent establishment, while C Co (i) obtains a tax benefit in not being subject to Australian royalty withholding tax and (ii) also reduces its liability to another foreign country s withholding tax. While the scheme might have some commercial benefits, such as centralizing accounts receivable functions (which may, in part, have motivated the scheme), the second component of the purpose test will still be met if (i) obtaining the tax benefit for B Co and (ii) the reduction in the foreign tax liability for C Co together form a principal reason for Figure 2 Structure as reconstructed under section 177A the non-resident s structuring its affairs in the manner described. Although the example in the Draft Explanatory Material does not directly deal with the consequences of the applicability of section 177DA, the clear implication is that B Co would be treated as having a permanent establishment in Australia to which a portion of the profits from the sale of the software would be attributed. 11 See Figure Situations where section 177DA will not apply Section 177DA will not apply, however, where a foreign corporation sells goods or services to Australian customers, in circumstances where the foreign corporation does not have an Australian permanent establishment, if the foreign corporation is not resident in a low- or no-tax corporate jurisdiction. For example, assume that UK Co, a resident of the United Kingdom, sells software to Australian business customers. An Australian subsidiary of UK Co (Sub Co) provides significant levels of support to Australian customers, but has no power to enter into sales contracts on behalf of UK Co. Orders are instead referred to UK Co in the United Kingdom. Even though the arrangements between UK Co and Sub Co might be said to have been implemented to avoid UK Co s deriving income in Australia, section177da will not apply. That is because UK Co is not connected with a lowor no-tax jurisdiction. UK Co instead is connected with the United Kingdom. 11. Draft EM, supra n. 1, para B Co PE in Australia Customers IBFD INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER

4 Michael Butler and Marianna Danby 4. Observations 4.1. Australia s tax treaty network Australia has income tax treaties (tax treaties) with over 40 countries. Those treaties are contained as schedules to the International Tax Agreements Act 1953 (Cth) (the IT(IA)), and the provisions of the ITAA 1936 and ITAA 1997 are expressly incorporated into the IT(IA). 12 The provisions of the IT(IA) have effect notwithstanding anything inconsistent with those provisions in the ITAA 1936 or ITAA 1997, other than Part IVA of the ITAA Australia s tax treaties generally provide that where an enterprise of the other contracting state (NR) carries on business in Australia, and NR does not carry on business in Australia at or through a permanent establishment located in Australia, NR s business profits are taxable only in the other contracting state. An enterprise will generally be deemed to have a permanent establishment in Australia if, among other things, it has a branch or office in Australia (a physical location), or a dependent agent in Australia who has, and habitually exercises, an authority to conclude contracts in Australia on the principal s behalf. Accordingly, if NR structures its affairs so that it does not have a physical permanent establishment in Australia, and ensures that no person has the power to enter into contracts in Australia on its behalf, NR should not be taxable on its business profits in Australia. As can be seen from the example in section 3. above, in the absence of the Multinational Anti-avoidance Law, this could be the case even though (i) a related party in Australia is instrumental in achieving the sales and (ii) NR pays little or no tax in the other contracting state due to the payment of royalties or other fees to a related party in a third country using the infamous Double Irish with a Dutch sandwich Australian Treasury July 2013 Scoping Paper The Scoping Paper released by the Australian Treasury in the middle of 2013 (the Scoping Paper) 14 noted that the permanent establishment rules were developed at a time when the majority of economic activity occurred at a physical location. The Scoping Paper observed that those principles have become less applicable since the rise of the digital economy, which does not have a physical location. 15 It was suggested that one option might be to change the rules so that they rely on the level of economic activity, rather than on a physical presence. 16 The proposed Multinational Anti-avoidance Law is clearly based on that suggestion. 12. AU: Income Tax (International Agreements) Act, 1953, as amended, sec. 4(1). 13. Sec. 4(2) IT(IA). 14. AU: The Treasury, Risks to the Sustainability of Australia s Corporate Tax Base (July 2013) (Scoping Paper). See M. Butler & L. White, The Treasury s Scoping Paper on Risks to the Sustainability of the Corporate Tax Base: Precursor to (Tax) Regime Change or Still Simply a Distant Galaxy many Light Years Away? 21 Intl. Transfer Pricing J. 1, at 31 (2014), Journals IBFD. 15. Treasury, supra n. 14, para Treasury, supra n. 14, para League of Nations The business profits articles in modern tax treaties can be traced back to the work of the League of Nations in the 1920s. That work, in turn, reflected case law that was decided in the late 1890s. 17 One significant question that arises is whether the proposed Multinational Anti-avoidance Law is an attempt to reverse, by domestic legislation, over 90 years of international tax principles. However, for the reasons set out below, it is suggested that the proposed Multinational Anti-avoidance Law is not inconsistent with Australia s treaty obligations Investigation into double taxation and evasion In 1920, the International Financial Conference held at Brussels recommended that the League of Nations take up the question of double taxation. The League s Financial Committee therefore referred the issue to four eminent economists for their views. In 1922, it was also decided to examine the problem of the flight of capital, and the Financial Committee requested that both questions (double taxation and tax evasion) be considered by a group of high-level officials from the tax administrations of various countries League of Nations reports In 1925, those officials submitted a detailed report which led, among other things, to the preparation of a Draft Convention for the Prevention of Double Taxation. In turn, that formed the basis of the League of Nations Draft Double Taxation Treaty (the League of Nations Treaty) in Article 5 of the League of Nations Treaty provided as follows: Income, not referred to in Article 7 [salary, wages or other remuneration], from any industrial, commercial or agricultural undertaking and from any other trades or professions shall be taxable in the State in which the permanent establishments are situated. The real centres of management, branches, mining and oil fields, factories, workshops, agencies, warehouses, offices, depots, shall be regarded as permanent establishments. The fact that an undertaking has business dealings with a foreign country through a bona-fide agent of independent status (broker, commission agent, etc.) shall not be held to mean that the undertaking in question has a permanent establishment in that country. Should the undertaking possess permanent establishments in both Contracting States, each of the two States shall tax the portion of the income produced in its territory. The competent administrations of the two Contracting States shall come to an arrangement as to the basis for apportionment The tax issues arising from international trade are certainly not a recent phenomenon. For example in Grainger & Son v. Gough, (1896] AC 325, an English agent was paid on a commission basis to transmit orders to his French principal for execution. The House of Lords held that the French merchant did not exercise a trade in the United Kingdom and therefore was not liable to English tax. In particular, Lord Herschell drew the critical distinction between trading with a country and carrying on a trade within a country. (1896) AC, at League of Nations, Double Taxation and Tax Evasion: Report, C M.85 (London, 12 Apr. 1927), at 5, League of Nations, Double Taxation and Tax Evasion: Report (Geneva, Oct. 1928). 20. Emphasis added. 352 INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER 2015 IBFD

5 Draft Legislation Released for Anti-Google Tax For the purposes of determining international competence in the matter of taxation, the 1925 report by the League of Nations Financial Committee (the 1925 Report) focused on (i) the origin of the relevant wealth and (ii) the domicile of the owner who consumes the wealth. 21 The 1925 Report noted: [...] origin is more important in the case of land, commercial, industrial and agricultural establishments, etc., and, as far as a tax on capital is concerned, mortgages. The element of domicile is, on the contrary, more important in the case of moveable property, transferable securities of every kind, general credits and personal earnings and, insofar as a tax on income is concerned, mortgages. 22 With reference to, among other things, income arising from carrying on an industry or business, the 1925 Report considered that: [ ] the taxes must be levied in the country of origin. That is to say, the country in which the source of the income is located (situation of the immovable property, situation of the mortgage, productive occupation, operation of the factory, etc.). 23 The 1925 Report continued: [ ] the treaty provides, with a view to giving effect to the rule of taxation in the country oforigin, for the assignment of income derived from carrying on an industry or business, ifthe industry has its headquarters in the territory of one of the Contracting States and one or more establishments in the territory of the other State League of Nations anticipated BEPS in 1925 In an extremely noteworthy observation, the 1925 Report stated as follows: In the case of legal entities (joint-companies) we propose that the fiscal domicile should be the place where the concern has its effective centre i.e., the place where the brain management and control of the business are situated. If this definition is accepted, businesseswill beprevented from nominally transferring their headquarters to a place where the taxes are lower than the country in which the effective centre of the business is situated. 25 The League of Nations was thus alive to the BEPS issue over 90 years ago! Implicitly: Profits will be taxed somewhere, rather than nowhere The principle behind article 5 and Australia s tax treaties is that commercial and industrial profits will not be taxed in a contracting state if there is no permanent establishment in that contracting state. The profits will instead be taxed in the other contracting state where the enterprise has its fiscal domicile. 21. League of Nations, Double Taxation and Tax Evasion Document F.212, Geneva, February 1925, at 10, League of Nations, Double Taxation and Tax Evasion Document F.212, supra n. 21, at 10, 4070 (emphasis added). 23. League of Nations, Double Taxation and Tax Evasion Document F.212, supra n. 21, at 13, 4073 (emphasis added). 24. League of Nations, Double Taxation and Tax Evasion Document F.212, supra n. 21, at 13, 4073 (emphasis added). 25. League of Nations, Double Taxation and Tax Evasion Document F.212, supra n. 21, at 21, 4081 (emphasis added). However, if the profits are not being taxed in the other contracting state (where, in the words of the League of Nations, the brain or management and control of the business is situated) for example due to the use of the Double Irish with a Dutch Sandwich the rationale for, and the principle underlying, the business profits article will not apply. This situation is clearly targeted by the Multinational Anti-avoidance Law legislation, and the authors therefore respectfully submit that this proposed law does not attempt to reverse 90 years of League of Nations law (and lore). For example, if a corporation resident in a country with which Australia has an income tax treaty (say, Ruritania) invests in Australia and derives profits in Australia, but claims the benefit of the business profits article under the Australia-Ruritania tax treaty, the base assumption is that the profits will be subject to tax in Ruritania. However, if the profits are not being taxed in Ruritania, Australia should have the right to apply its domestic general antiavoidance provisions under part IVA of the ITAA Further Issues The following issues have been raised in connection with the proposed Multinational Anti-avoidance Law Principal purpose versus sole or principal purpose Proposed section 177DA will apply where it would be concluded the scheme was entered into for a principal purpose of enabling a taxpayer to obtain a tax benefit, whereas part IVA otherwise applies where a scheme was entered into for the sole or dominant purpose of obtaining a tax benefit. If this introduces a lower threshold, as suggested by the Draft Explanatory Material, 26 it will further increase the practical difficulties associated with applying the new rules What qualifies as a low-tax jurisdiction? Section 177EA provides no guidance as to when a jurisdiction will be treated as a low-tax jurisdiction. Australian tax is currently imposed on the income and gain of companies at the rate of 30%. If a jurisdiction imposes tax at a rate that is less than (say) one-half of the Australian rate (i.e. less than 15%), will that jurisdiction be deemed to be low tax, or must the rate be less than one third of the Australian rate (i.e. less than 10%)? Where does one draw the line? 5.3. Reconstructing liability if section 177DA applies Perhaps the main area of uncertainty relates to the amount of profit that is taxable if the non-resident s tax liability is reconstructed under part IVA. If section 177DA applies, the Draft Explanatory Material assumes that the profits will be taxed as if the foreign resident had a permanent 26. Draft EM, supra n. 1, para IBFD INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER

6 Michael Butler and Marianna Danby establishment in Australia. 27 However, the amount of profit that is properly attributable to that permanent establishment is not immediately clear. At first sight, it would seem that the permanent establishment would be entitled to only an arm s length sales commission or distributor s profit, on the basis that if the scheme had not been entered into, the non-resident corporation would have operated through a branch or agent, or would have organized an Australian subsidiary to distribute its product. However, this may not result in a multinational corporation paying its fair share of tax and paying tax where profits are derived, in the sense of being assessed on a significant proportion of the sales price in Australia, as appears to be intended by the new rules. The difficulties raised by this potential problem have not been addressed in (and no guidance is provided by) the Draft bill or the Draft Explanatory Material Date of commencement of applicability The rules would apply in relation to tax benefits obtained on or after 1 January 2016, whether or not the scheme was entered into before that day. The clear intention is that the new rules should apply to existing structures with no grandfathering. Given that administrative penalties will potentially be as high as 120% (double the maximum penalty under existing law), 28 this will give rise to some very interesting issues. In particular: Will the 30 corporations at which the Multinational Anti-avoidance Law is aimed simply restructure to avoid a potentially extremely costly, high-stakes dispute with the ATO? Or will they rely on the opinions (presumably) provided by their professional advisors that they have a reasonably arguable position? Even if they have a reasonably arguable position, are they prepared to take the risk that penalties could still be as high as 120%? Even if they wish to restructure and operate in Australia through an Australian subsidiary or as a permanent establishment, will they have time to reorganize their activities before midnight on 31 December 2015? Indeed, it has been reported that the American Chamber of Industry in Australia (AmCham) has written to the Treasurer to emphasize the difficulties of implementing a revised business model by 1 January Conclusion The Australian government is clearly committed to amending part IVA to deal with the 30 multinationals identified as avoiding Australian tax by not establishing an Australian taxable presence. This is despite concerns expressed by US Treasury officials such as Robert Stack (Deputy Assistant Secretary, International Tax Affairs (Tax Policy)) that [ ] it was critical that Group of 20 countries like Australia that were participating in global tax negotiations did not pass laws on their own that would contradict international agreements. 30 Whether proposed section 177DA will be enacted as currently drafted, or whether some form of compromise will be reached before the 1 January 2016 start date, will therefore be watched with great interest. While it seems most unlikely that the Australian government will back down on the Multinational Anti-avoidance Law proposal, the authors respectfully submit that Australia should hasten slowly, given the potential international implications. Postscript On 16 September 2015, the government introduced into Parliament the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 (CMTA bill), which contains a revised version of the provisions in the Draft bill. In broad terms, the bill targets entities that are part of a multinational group earning AUD 1 billion or more of income worldwide annually. The CMTA bill introduces three of the measures announced in the Federal Government s Budget, namely: the Multinational Anti-avoidance Law; country-by-country reporting; and increased penalties to combat tax avoidance and profit shifting. Paragraph 2.5 of the Explanatory Memorandum that accompanies the CMTA bill states as follows: The measures are targeted at these entities because large multinationals have the greatest opportunities to avoid tax through offshore activities and represent the highest risk to Australia s tax base. The provisions in the CMTA bill are similar, but not identical, to the provisions in the Draft bill, and will be considered in detail in a subsequent article in this journal. Two points should, however, be mentioned. First, during the Second Reading Speech on 16 September 2015, the then Treasurer, the Hon Joe Hockey, told Parliament: We have strengthened the law by removing the condition for multinationals to operate in a no-tax or low-tax jurisdiction. 27. Draft EM, supra n. 1, para Division 284, Sch. 1, Taxation Administration Act, J. Mather & P. Riordan, US Firms Demand More Time for Tax, Australian Fin. Rev. (18 Aug. 2015). 30. J. Kehoe, US Treasury Pressures Tony Abbott to drop Google Tax, Australian Fin. Rev. (27 Apr. 2015). 354 INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER 2015 IBFD

7 Figure 3: OECD Base Erosion and Profit Shifting: Australia Leading the Response* Government Priority Actions Status Australian action OECD Item 1: Tax challenges of digital economy Digital economy issues addressed by other Action Items. The Government has announced that it will introduce an integrity measure to apply the GST to digital products and services imported by Australian consumers, which is consistent with this item. OECD Item 2: Neutralise hybrid Board of Tax consultation commenced in August and will report in March 2016 mismatch across borders allowing double non-taxation OECD Item 3: Controlled foreign Australia s CFC rules meet OECD best practice guidance company rules OECD Item 4: Limit interest Australia has already tightened its thin capitalisation rules deductions OECD Item 5: Counter harmful tax ATO already implemented exchange of rulings practices OECD Item 6: Prevention of treatyshopping To be adopted into negotiation of new/updated treaties OECD Item 7: Prevent artificial avoidance of permanent establishment OECD Item 8, 9 and 10: Transfer pricing and value creation OECD Item 11: Methodologies to collect and analyse BEPS data OECD Item 12: Mandatory disclosure of aggressive tax planning OECD Item 13: Transfer pricing documentation and country-bycountry reporting The Multinational Anti-Avoidance Law is consistent with this item. Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 is before Parliament. Other OECD recommendations are in line with Australia s treaty practice. No fundamental change to Australia s transfer pricing rules, but enhanced guidance to help ATO s administration Estimate of BEPS problem 4-10 per cent of global corporate income tax revenue. Further work on methodologies to measure progress required OECD recommends countries consider adopting disclosure rules. ATO considering costs and benefits for Australia Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 before Parliament OECD Item 14: Dispute resolution A number of countries (including Australia) are committed to binding arbitration OECD item 15: Multilateral instrument 87 countries (including Australia) working on instrument to quickly update bilateral treaties with BEPS outcomes. To be open for signing by end 2016 Key No major issues expected Further work on implementation being undertaken * Source: The Hon Scott Morrison MP, OECD report supports Australian Government action on multinational tax avoidance. Draft Legislation Released for Anti-Google Tax All significant global entities with revenues over AUD 1 billion who book their revenue offshore will need to consider these rules and may need to review their structures. With over 1,000 multinational entities operating in Australia with revenues greater than AUD $1 billion globally, this means these rules will have a far reaching effect and ensure that multinationals do not inappropriately slip through our tax net. It will be recalled (see section 1.) that the new rules were originally targeted at the 30 multinational corporations with which the ATO was apparently having discussions (the so-called dirty thirty ) and possibly a further 100 companies. However, there is now significant concern that the new rules may affect up to 1,000 companies. The fact that there is no longer a requirement that the multinational company operate in a no- or low-tax country, also significantly expands the potential ambit of the rules. Second, whereas the Draft bill targeted arrangements where the principal purpose of a structure was to avoid tax, the CMTA bill would apply where one or more of the principal purposes of an arrangement was to avoid tax. That clearly is an even lower threshold. The CMTA bill has been referred to the Senate Economics Legislation Committee for inquiry and report by 9 November Given that the commencement date for the new rules remains 1 January 2016, multinational groups need to immediately review their arrangements to ensure they will comply with the new Australian legislation. Finally, on 6 October 2015 the new Treasurer, the Hon Scott Morrison MP, 31 issued a Media Release (the Media Release) responding to the issuance on the previous day of the OECD s Final Report on the BEPS Action Plan. The Treasurer claimed that [t]he strong measures already taken by the Australian Government are entirely consistent with the final OECD recommendations. The Treasurer then continued: The Australian Government is proud to have led the way globally in this fight against tax avoidance during its G20 presidency 31. The Hon Scott Morrison MP, OECD report supports Australian Government action on multinational tax avoidance, available at ministers.treasury.gov.au/media-release/ IBFD INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER

8 Michael Butler and Marianna Danby in 2014 and we now have some of the strongest in tax integrity rules in the world. The Government has: In the last sitting fortnight introduced to Parliament the Multinational Anti-Avoidance Law, delivering on our 2015 Budget commitment, to ensure that where companies make sales in Australia, but book that revenue offshore, they will be subject to tax in Australia; Doubled the penalties for those who choose to break the rules through transfer pricing and profit shifting schemes; Obtained the in-principle agreement of the States and Territories to apply the GST to digital products and services imported by Australian consumers; Obtained the in-principle agreement of the States and Territories to abolish the GST low value threshold, ensuring that GST will apply to goods valued at or below $1000 that are imported by Australian consumers. This ensures that Australian retailers can compete on a more level playing field with overseas outlets; Introduced Country-by-Country reporting and new transfer pricing documentation standards to give the Australian Taxation Office a greater ability to assess transfer pricing risks; Tasked the Board of Taxation with consultation on the OECD s recommendations to combat hybrid mismatches that allow companies to issue financial instruments and claim a deduction in one jurisdiction but not pay tax in another. The Media Release also contained an attachment, set out in Figure 3, demonstrating the government s commitment to the OECD programme. Despite strong submissions that Australia should not go it alone and introduce unilateral measures, and concerns that the 1 January 2016 start date will not provide multinationals with sufficient time to prepare, Australia s antitax avoidance juggernaut is clearly rolling on. IBFD, Your Portal to Cross-Border Tax Expertise IBFD provides tax practitioners around the world with the most complete coverage of international taxation available. We supply information at various levels, allowing you to get quick answers as well as formulate profound analytic insights. The IBFD Tax Research Platform is your online smart access to all IBFD products and, as a subscriber, you can view all information related to your subscriptions at once. IBFD Tax Research Platform Get the depth you need from a single source The Platform provides: X In-depth topical & country information X Interlinked content X Up-to-the minute global tax information X Direct links to Tax News Service X Quick reference tables and much more To see the full content, please visit Contact us IBFD Head Office P.O. Box Rietlandpark HE Amsterdam, 1019 DW Amsterdam The Netherlands Tel.: (GMT+1) Customer Support: info@ibfd.org Sales: sales@ibfd.org Online: 015TRP-A01-H 356 INTERNATIONAL TRANSFER PRICING JOURNAL NOVEMBER/DECEMBER 2015 IBFD